UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-27022
OPTICAL CABLE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1237042
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5290 Concourse Drive
Roanoke, Virginia 24019
(Address of principal executive offices, including zip code)
(540) 265-0690
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes X No___ (2) Yes X No___
As of March 15, 2002, 55,431,279 shares of the registrant's Common
Stock, no par value, were outstanding.
OPTICAL CABLE CORPORATION
Form 10-Q Index
Three Months Ended January 31, 2002
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - January 31, 2002
and October 31, 2001..........................................2
Condensed Statements of Operations - Three Months
Ended January 31, 2002 and 2001...............................3
Condensed Statement of Changes in Stockholders'
Equity - Three Months Ended January 31, 2002..................4
Condensed Statements of Cash Flows - Three Months
Ended January 31, 2002 and 2001...............................5
Condensed Notes to Condensed Financial Statements............6-12
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................13-21
Item 3.Quantitative and Qualitative Disclosures About Market Risk.........22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................23
Item 2. Changes in Securities and Use of Proceeds .....................24
Item 5. Other Information..............................................25
Item 6. Exhibits and Reports on Form 8-K...............................25
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OPTICAL CABLE CORPORATION
Condensed Balance Sheets
(Unaudited)
-----------------
January 31, October 31,
Assets 2002 2001
----------------- ------------------
Current assets:
Cash and cash equivalents $ 2,539,569 $ 2,087,608
Trade accounts receivable, net of allowance for doubtful
accounts of $839,482 at January 31, 2002 and $572,853
at October 31, 2001 9,407,934 10,678,214
Income taxes refundable 806,704 1,108,007
Other receivables 497,056 371,656
Due from employees, net of allowance for uncollectible
advances of $70,000 34,793 35,018
Inventories 13,861,372 14,084,931
Prepaid expenses 260,924 185,831
Deferred income taxes 276,181 260,709
----------------- ------------------
Total current assets 27,684,533 28,811,974
Other assets -- 367,469
Property and equipment, net 12,459,371 12,685,053
Deferred income taxes 896,822 933,801
----------------- ------------------
Total assets $ 41,040,726 $ 42,798,297
================= ==================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 6,563,000 $ 8,271,000
Accounts payable and accrued expenses 5,133,778 5,537,313
Accrued compensation and payroll taxes 547,715 798,203
----------------- ------------------
Total current liabilities 12,244,493 14,606,516
Other liabilities 326,553 326,553
----------------- ------------------
Total liabilities 12,571,046 14,933,069
----------------- ------------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares;
none issued and outstanding -- --
Common stock, no par value, authorized 100,000,000 shares;
issued and outstanding 55,431,279 shares -- --
Retained earnings 28,469,680 27,865,228
----------------- ------------------
Total stockholders' equity 28,469,680 27,865,228
Commitments and contingencies
----------------- ------------------
Total liabilities and stockholders' equity $ 41,040,726 $ 42,798,297
================= ==================
See accompanying condensed notes to condensed financial statements.
2
OPTICAL CABLE CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Ended
January 31,
-------------------------------------
2002 2001
----------------- ------------------
Net sales $ 11,391,421 $ 16,996,200
Cost of goods sold 6,895,184 9,117,931
----------------- ------------------
Gross profit 4,496,237 7,878,269
Selling, general and administrative expenses 3,506,417 3,927,814
----------------- ------------------
Income from operations 989,820 3,950,455
Other income (expense):
Losses on trading securities, net -- (3,991,181)
Interest income 7,152 15,764
Interest expense (64,704) (149,870)
Other, net 184 (1,496)
----------------- ------------------
Other expense, net (57,368) (4,126,783)
----------------- ------------------
Income (loss) before income tax
expense (benefit) 932,452 (176,328)
Income tax expense (benefit) 328,000 (61,715)
----------------- ------------------
Net income (loss) $ 604,452 $ (114,613)
================= ==================
Net income (loss) per share:
Basic and diluted $ 0.01 $ --
================= ==================
See accompanying condensed notes to condensed financial statements.
3
OPTICAL CABLE CORPORATION
Condensed Statement of Changes in Stockholders' Equity
(Unaudited)
Three Months Ended January 31, 2002
-------------------------------------------------------------------------
Common Stock Total
----------------------------------- Retained Stockholders'
Shares Amount Earnings Equity
--------------- ---------------- ---------------- ----------------
Balances at October 31, 2001 55,431,279 $ -- $ 27,865,228 $ 27,865,228
Net income -- -- 604,452 604,452
--------------- ---------------- ---------------- ----------------
Balances at January 31, 2002 55,431,279 $ -- $ 28,469,680 $ 28,469,680
=============== ================ ================ ================
See accompanying condensed notes to condensed financial statements.
4
OPTICAL CABLE CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
January 31,
-------------------------------------
2002 2001
----------------- ------------------
Cash flows from operating activities:
Net income (loss) $ 604,452 $ (114,613)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 293,718 237,930
Bad debt expense 270,659 430,656
Deferred income tax expense 21,507 753,711
Stock-based compensation expense -- 20,384
Unrealized losses on trading securities, net -- 435,231
Decrease in trading securities -- 1,472,599
Increase in payable to investment broker related to
securities trading -- 1,233,219
(Increase) decrease in:
Trade accounts receivable (before bad debt expense) 999,621 (2,605,654)
Income taxes refundable 301,303 (817,626)
Other receivables (125,400) (81,000)
Due from employees 225 525
Inventories 223,559 (316,106)
Prepaid expenses (75,093) (80,918)
Increase (decrease) in:
Accounts payable and accrued expenses and other liabilities (346,585) 1,127,258
Accrued compensation and payroll taxes (250,488) (206,025)
----------------- ------------------
Net cash provided by operating activities 1,917,478 1,489,571
----------------- ------------------
Cash flows from investing activities:
Purchase of property and equipment (124,986) (625,828)
Increase in cash surrender value of life insurance -- (27,016)
Receipt of cash surrender value of life insurance 367,469 --
----------------- ------------------
Net cash provided by (used in) investing activities 242,483 (652,844)
----------------- ------------------
Cash flows from financing activities:
Repayment of notes payable to bank, net (1,708,000) --
Repurchase of common stock -- (1,322,065)
Proceeds from exercise of employee stock options -- 2,118
----------------- ------------------
Net cash used in financing activities (1,708,000) (1,319,947)
----------------- ------------------
Net increase (decrease) in cash and cash equivalents 451,961 (483,220)
Cash and cash equivalents at beginning of period 2,087,608 1,458,896
----------------- ------------------
Cash and cash equivalents at end of period $ 2,539,569 $ 975,676
================= ==================
See accompanying condensed notes to condensed financial statements.
5
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Three Months Ended January 31, 2002
(Unaudited)
(1) General
The accompanying unaudited condensed financial statements of Optical
Cable Corporation (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America
for interim financial reporting information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all material adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months
ended January 31, 2002 are not necessarily indicative of the results that
may be expected for the fiscal year ending October 31, 2002. The
unaudited condensed financial statements and condensed notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual financial statements and
notes. For further information, refer to the financial statements and
notes thereto included in the Company's annual report on Form 10-K for
the fiscal year ended October 31, 2001.
(2) Allowance for Doubtful Accounts for Trade Accounts Receivable
A summary of changes in the allowance for doubtful accounts for trade
accounts receivable for the three months ended January 31, 2002 and 2001
follows:
Three Months Ended
January 31,
-----------------------------------------
2002 2001
------------------- -------------------
Balance at beginning of period $ 572,853 $ 1,909,069
Bad debt expense 270,659 430,656
Losses charged to allowance (4,030) (2,191,105)
Recoveries added to allowance -- 565
------------------- -------------------
Balance at end of period $ 839,482 $ 149,185
=================== ===================
One of the Company's two major distributors filed for protection from its
creditors under bankruptcy laws in January 2001. As of October 31, 2000,
the Company specifically reserved approximately $1,772,000 for estimated
uncollectible accounts receivable from this distributor. As of January
31, 2001, the Company wrote off that $1,772,000 reserve, as well as an
additional bad debt reserve related to this distributor of approximately
$419,000 incurred during the first quarter of fiscal year 2001, for a
total write-off of approximately $2,191,000 for estimated uncollectible
accounts receivable from this distributor for the three months ended
January 31, 2001. There were no net sales attributed to this distributor
subsequent to the first quarter of fiscal year 2001.
6
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Three Months Ended January 31, 2002
(Unaudited)
(3) Inventories
Inventories as of January 31, 2002 and October 31, 2001 consist of the
following:
January 31, October 31,
2002 2001
------------------- -------------------
Finished goods $ 4,786,716 $ 4,328,379
Work in process 3,054,089 3,064,975
Raw materials 5,971,377 6,641,985
Production supplies 49,190 49,592
------------------- -------------------
$ 13,861,372 $ 14,084,931
=================== ===================
(4) Notes Payable to Bank
Under a loan agreement with its bank dated March 10, 1999 and amended on
October 30, 2001, the Company has a $5 million secured revolving line of
credit and a $4.5 million secured revolving line of credit. As of January
31, 2002 and October 31, 2001, the Company had combined outstanding
borrowings under these lines of credit in the amount of $6,563,000 and
$8,271,000, respectively, with $2,937,000 and $1,229,000, respectively,
unused and available.
The lines of credit bear interest at 1.50% above the monthly LIBOR rate
(3.35% as of January 31, 2002 and 3.79% as of October 31, 2001) and are
equally and ratably collateralized by the Company's accounts receivable,
contract rights, inventory, furniture and fixtures, machinery and
equipment and general intangibles. The lines of credit have been extended
and will expire on March 31, 2002, unless they are further renewed or
extended. While the lines of credit do not require a compensating balance
that legally restricts the use of cash amounts, at the bank's request,
the Company has agreed to maintain an unrestricted target cash balance of
$125,000.
(5) Stock Option Plan
The Company applies the provisions of Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations for employee stock option grants and SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION and EITF Issue No. 96-18,
ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES
7
(Continued)
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Three Months Ended January 31, 2002
(Unaudited)
FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, for
nonemployee stock option grants. Stock option activity during the three
months ended January 31, 2002 is as follows:
Number of Weighted-Average
Shares Exercise Price
------------------ -------------------
Balance at October 31, 2001 1,013,562 $6.97
Granted 250,000 1.25
Exercised -- --
Forfeited (1,875) 10.04
------------------
Balance at January 31, 2002 1,261,687 $6.97
==================
As of January 31, 2002, there were approximately 4,100,000 additional
shares available for grant under the Plan.
The options granted during the three months ended January 31, 2002 were
granted to executive officers of the Company with a per share exercise
price of $1.25 equal to the closing price of the Company's common stock
on the date of grant, and vest in equal monthly installments over four
years.
Subsequent to January 31, 2002, the Board of Directors approved grants of
stock options to purchase a total of 24,975 shares of the Company's
common stock at an exercise price of $0.89 per share, the closing price
at the date of grant. These grants were made to independent members of
the Board of Directors who had not served as an executive officer of the
Company during the past year. The grants were effective February 12,
2002. These options vest monthly over one year.
On March 5, 2002, the Compensation Committee of the Board of Directors
approved grants of stock options to purchase a total of 2,388,000 shares
of the Company's common stock at an exercise price of $0.90 per share,
the closing price at the date of grant. These grants were made to
employees (other than the executive officers) and non-employee outside
sales personnel. These options vest in equal quarterly installments over
five years.
(6) Net Income (Loss) Per Share
Basic net income (loss) per share excludes dilution and is computed by
dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted net income (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the net income (loss) of the Company.
The following is a reconciliation of the numerators and denominators of
the net income (loss) per share computations for the periods presented:
8
(Continued)
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Three Months Ended January 31, 2002
(Unaudited)
Net Income Shares Per Share
Three Months Ended January 31, 2002 (Numerator) (Denominator) Amount
------------------------------------------ ----------------- --------------------- --------------
Basic net income per share $ 604,452 55,431,279 $ 0.01
==============
Effect of dilutive stock options -- 24,297
----------------- ---------------------
Diluted net income per share $ 604,452 55,455,576 $ 0.01
================= ===================== ==============
Net Loss Shares Per Share
Three Months Ended January 31, 2001 (Numerator) (Denominator) Amount
------------------------------------------ ----------------- --------------------- --------------
Basic net loss per share $ (114,613) 56,355,984 $ --
==============
Effect of dilutive stock options -- 365,791
----------------- ---------------------
Diluted net loss per share $ (114,613) 56,721,775 $ --
================= ===================== ==============
Stock options that could potentially dilute net income (loss) per share
in the future that were not included in the computation of diluted net
income (loss) per share (because to do so would have been antidilutive
for the periods presented) totaled 763,562 for the three months ended
January 31, 2002. No such antidilutive stock options existed with respect
to diluted net loss per share calculation for the three months ended
January 31, 2001.
(7) Stockholders' Equity
On November 2, 2001, the Board of Directors of the Company adopted a new
Shareholder Rights Plan (the "Rights Plan") and declared a dividend of
one preferred share purchase right (a "Right") on each outstanding share
of common stock. Under the terms of the Rights Plan, if a person or group
acquires 15% (or other applicable percentage, as provided in the Rights
Plan) or more of the outstanding common stock, each Right will entitle
its holder (other than such person or members of such group) to purchase,
at the Right's then current exercise price, a number of shares of common
stock having a market value of twice such price. In addition, if the
Company is acquired in a merger or other business transaction after a
person or group has acquired such percentage of the outstanding common
stock, each Right will entitle its holder (other than such person or
members of such group) to purchase, at the Right's then current exercise
price, a number of the acquiring company's common shares having a market
value of twice such price.
Upon the occurrence of certain events, each Right will entitle its holder
to buy one one-thousandth of a Series A preferred share ("Preferred
Share"), at an exercise price of $25, subject to adjustment. Each
Preferred Share will entitle its holder to 1,000 votes and will have an
aggregate dividend rate of 1,000 times the amount, if any, paid to
holders of common stock. The Rights will expire on November 2, 2011,
unless the date is extended or unless the Rights are earlier redeemed or
exchanged at the option of the Board of Directors for $0.0001 per Right.
Generally, each share of common stock issued after November 5, 2001 will
have one Right attached. The adoption of the Rights Plan has no impact on
the financial position or results of operations of the Company.
9
(Continued)
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Three Months Ended January 31, 2002
(Unaudited)
The Company has reserved 100,000 of its authorized preferred stock for
issuance upon exercise of the Rights.
(8) Personnel Matters
On December 3, 2001, the Company issued a press release that announced
that, upon the recommendation of the independent Special Committee of its
Board of Directors, the Board of Directors had removed Robert Kopstein as
the Company's Chairman, President and Chief Executive Officer. Also see
note 10.
(9) Segment Information and Business and Credit Concentrations
The Company has a single reportable segment for purposes of segment
reporting pursuant to SFAS No. 131. In addition, the Company's fiber
optic cable products are similar in nature.
The Company provides credit, in the normal course of business, to various
commercial enterprises, governmental entities and not-for-profit
organizations. Concentration of credit risk with respect to trade
receivables is limited due to the Company's large number of customers.
The Company also manages exposure to credit risk through credit
approvals, credit limits and monitoring procedures. Management believes
that credit risks as of January 31, 2002 and October 31, 2001 have been
adequately provided for in the financial statements.
For the three months ended January 31, 2002 and 2001, no single customer
accounted for more then 10% of net sales. During first quarter 2002, one
of the Company's major domestic distributors advised the Company that it
will no longer stock the Company's products as part of its regular
product offering. For the three months ended January 31, 2001 and 2000,
approximately 66% and 77%, respectively, of net sales were from customers
located in the United States, while approximately 34% and 23%,
respectively, were from international customers.
(10) Contingencies
On September 27, 2000, the Equal Employment Opportunity Commission
("EEOC") filed a lawsuit under Title VII of the Civil Rights Act against
the Company in the United States District Court for the Western District
of Virginia. The lawsuit alleged a pattern or practice of discrimination
on the bases of gender and race. The lawsuit sought injunctive and other
relief and damages in an unspecified amount. On December 13, 2001, the
parties reached an agreement as to the amount of a settlement (subject to
final documentation and judicial review and approval). On February 20,
2002, the Company reached a final settlement of the case and the court
issued a Consent Decree setting forth the terms of the settlement.
Pursuant to the settlement and Consent Decree, the Company paid $500,000
on or about February 20, 2002; and will pay $175,000 in January 2003 and
$175,000 in January 2004, to satisfy any gender and race class claims;
10
(Continued)
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Three Months Ended January 31, 2002
(Unaudited)
the Company paid $75,000 on or about February 20, 2002 to one individual
specifically named in the complaint; and will spend at least $75,000 for
the Company's planned diversity, recruitment and human resource
management programs over the term of the Consent Decree. The Company
recorded a charge in the fourth quarter of fiscal year 2001 in the amount
of $901,553 representing $575,000 (current portion) payable upon entry of
the Consent Decree, as well as $326,553 (noncurrent portion) representing
the present value of two equal payments in the amount of $175,000 payable
in January 2003 and 2004. No additional charges were recorded in first
quarter 2002 as a result of the settlement. The $75,000 to be used for
the Company's planned diversity, recruitment and human resource
management programs will be expensed as incurred.
The Company was named as a defendant in two lawsuits filed in the United
States District Court for the Southern District of New York seeking to
compel the Company to authorize its transfer agent to transfer
unregistered, restricted stock on the Company's stock ledger. The first
suit was filed on October 22, 2001, by Bear, Stearns & Co. Inc. and Bear,
Stearns Securities Corporation (collectively, "Bear Stearns"). The second
suit was filed on October 26, 2001, by UBS PaineWebber Inc.
("PaineWebber"). In each case, PaineWebber and Bear Stearns sought
injunctive relief with respect to common stock of the Company sold by
them in the course of liquidating either repossessed shares or brokerage
accounts of the Company's former Chairman, President and Chief Executive
Officer, to cover personal margin loans made by the brokerage firms to
him. Subsequent to January 31, 2002, both suits also contained a claim of
monetary damages caused by the alleged wrongful refusal by the Company to
authorize the transfers in connection with the liquidations. Subsequent
to January 31, 2002, both suits were dismissed. PaineWebber voluntarily
dismissed its lawsuit with prejudice, while the Bear Stearns lawsuit was
voluntarily dismissed without prejudice.
The Company, Mr. Robert Kopstein (our former Chairman, President and
Chief Executive Officer, and various John Does (unidentified officers
and/or directors of the Company during the class period described below)
were named as defendants in four putative class action lawsuits filed in
the United States District Court for the Western District of Virginia
(the "Suits"). The first class action lawsuit was filed on November 26,
2001, by Charles S. Farrell, Jr., on behalf of himself and others
similarly situated. The second class action lawsuit was filed on December
14, 2001, by Lerner Group, on behalf of itself and others similarly
situated. The third class action lawsuit was filed on December 27, 2001,
by Richard Simone, on behalf of himself and others similarly situated.
The fourth class action lawsuit was filed on January 31, 2002 by Charles
H. Yeatts, on behalf of himself and others similarly situated. In each of
the substantially similar suits, the plaintiffs purported to represent
11
(Continued)
OPTICAL CABLE CORPORATION
Condensed Notes to Condensed Financial Statements
Three Months Ended January 31, 2002
(Unaudited)
purchasers of the Company's common stock during the period from July 31,
2000, through October 8, 2001 (the putative class period), and allege
that the defendants violated Sections 10(b) and 20 of the federal
Securities Exchange Act of 1934 and were negligent in making certain
alleged misrepresentations and/or omitting to disclose material facts.
The plaintiffs in each of the Suits seek compensatory and exemplary
damages in an unspecified amount, as well as reasonable costs and
expenses incurred in the cause of action, including attorneys' fees and
expert fees. Under Private Securities Litigation Reform Act of 1995, the
United States District Court for the Western District of Virginia is
required to appoint an individual shareholder or group of shareholders as
the lead plaintiff for the Suits. We anticipate that the Court will also
consolidate the Suits into a single action and that the lead plantiff
will file a consolidated amended class action complaint.
Management intends to vigorously defend the Suits. The Company may,
however, incur substantial costs in defending the Suits, regardless of
their merit or outcome. At this early stage in the Suits, management
cannot make a reasonable estimate of the monetary amount of their
resolution, or estimate a range of reasonably possible losses, if any. If
the Company is unsuccessful, it could be subject to damages that may be
substantial and could have a material adverse effect on the Company's
financial position, results of operations and liquidity.
From time to time, the Company is involved in various other claims and
legal actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Information
This Form 10-Q may contain certain "forward-looking" information within the
meaning of the federal securities laws. The forward-looking information may
include, among other information, statements concerning our outlook for the
future, statements of belief, future plans, strategies or anticipated events,
and similar information and statements concerning matters that are not
historical facts. The forward-looking information is subject to risks and
uncertainties that may cause actual events to differ materially from our
expectations. Factors that could cause or contribute to such differences
include, but are not limited to, the level of sales to key customers or
distributors; the economic conditions affecting network service providers; the
slowdown in corporate spending on information technology; actions by
competitors; fluctuations in the price of raw materials (including optical
fiber); our dependence on a single manufacturing facility; our ability to
protect our proprietary manufacturing technology; market conditions influencing
prices or pricing; our dependence on a limited number of suppliers; volume
commitments made to certain of our suppliers; an adverse outcome in litigation,
claims and other actions, and potential litigation, claims and other actions
against us, including, but not limited to, the shareholder litigation that has
been filed; the effect of sales of common stock by the various brokerage firms
alleging that our former Chairman, President and Chief Executive Officer pledged
substantially all of his personally-held unregistered shares of Optical Cable
Corporation (the "Company") to cover personal margin loans; technological
changes and introductions of new competing products; the current recession;
terrorist attacks or acts of war, particularly given the acts of terrorism
against the United States on September 11, 2001 and subsequent military
responses by the United States; ability to retain key personnel; changes in
market demand; exchange rates; productivity; weather; and market and economic
conditions in the areas of the world in which the Company operates and markets
its products.
Amounts presented in the following discussion have been rounded to the nearest
hundred thousand, unless the amounts are less than one million, in which case
the amounts have been rounded to the nearest thousand.
Overview
We are a leading manufacturer of a broad range of tight-buffered fiber optic
cables primarily for the local area network and premise markets, often referred
to as the enterprise market. Our tight-buffered fiber optic cables are
well-suited for use in short to moderate distance applications to connect
metropolitan, access and enterprise networks. Our tight-buffered fiber optic
cables are derived from technology originally developed for military
applications requiring rugged, flexible and compact fiber optic cables. Our
tight-buffered fiber optic cables can be used both indoors and outdoors, are
easy and economical to install, provide a high degree of reliability and offer
industry leading performance characteristics. We have designed and implemented
an efficient and highly automated manufacturing process based on proprietary
technologies. This enables us to produce high quality indoor/outdoor
tight-buffered fiber optic cable rapidly and cost efficiently.
We sell our products through our sales force to original equipment manufacturers
and to major distributors, regional distributors and various smaller
distributors. For first quarter 2002 ending January 31, 2002 and first quarter
2001 ending January 31, 2001, 40.3% and 45.3% of our net sales were from sales
to our distributors. International net sales were 34.1% and 22.7% for the first
quarter 2002 and first quarter 2001, respectively. Substantially all of our
international sales are denominated in U.S. dollars.
13
Net sales consist of gross sales of products less discounts, refunds and
returns. Revenue is recognized at the time of product shipment or delivery to
the customer and the customer takes ownership and assumes risk of loss, based on
shipping terms. No single customer accounted for more than 10% of our net sales
during first quarter 2002 or first quarter 2001. During first quarter 2002, one
of our major domestic distributors advised us that it will no longer stock our
products as part of its regular product offering.
A significant percentage of the selling price of our fiber optic cable is based
on the cost of raw materials used. Because single-mode fiber is less expensive
than multimode fiber, single-mode fiber optic cables have a lower per unit
selling price than comparable multimode fiber optic cables. We believe that the
metropolitan and access markets are predominantly users of single-mode fiber
optic cable, and that increasingly, single-mode fiber is also being used for
other short to moderate distance installations where higher bandwidth is
required. To the extent that our sales mix shifts toward the metropolitan and
access markets and our product mix shifts toward single-mode cables, we will
have to increase the volume of our sales to maintain our current level of net
sales. Increased volume may require us to expand our manufacturing capacity more
rapidly.
Cost of goods sold consists of the cost of materials, compensation costs,
product warranty costs and overhead related to our manufacturing operations. The
largest percentage of costs included in cost of goods sold is attributable to
costs of materials that are variable as opposed to fixed costs.
Selling, general and administrative expenses consist of the compensation costs
for sales and marketing personnel, shipping costs, travel expenses, customer
support expenses, trade show expenses, advertising, bad debt expense, the
compensation cost for administration, finance and general management personnel,
as well as legal and accounting fees.
Other income (expense), net consists primarily of realized and unrealized net
gains (losses) on trading securities, interest income and interest expense. In
January 2000, we began actively buying and selling shares in the Nasdaq 100
Trust, which is designed to closely track the price and yield performance of the
Nasdaq 100 stock index. We utilized short-term margin borrowings payable to an
investment broker to finance our position in these trading securities. Our
margin borrowings were collateralized by the trading securities and were subject
to margin provisions, which could have resulted in the sale of some or all of,
and on certain occasions did result in the sale of some of, the trading
securities to meet margin calls. Our active trading in the Nasdaq 100 Trust
continued through May 14, 2001, the date of the last purchase of these shares.
On October 3, 2001, as part of a policy to invest future excess funds only in
short-term interest-bearing investments, we sold all of our remaining investment
in the Nasdaq 100 Trust and paid off the outstanding margin borrowings. As a
result, there were no gains (losses) resulting from the trading of securities
for first quarter 2002. Our Board of Directors has adopted an Investment
Objectives and Guidelines policy, in which we state that we will make no
additional cash investments in the above-mentioned Nasdaq 100 Trust or in stocks
of other companies. In addition, our Investment Objectives and Guidelines policy
states that any future investments will be in U.S. dollar denominated,
short-term, interest-bearing, investment-grade securities.
For accounting purposes during first quarter 2001, we categorized our investment
in the Nasdaq 100 Trust as trading securities, and we recorded the investment on
our balance sheet at fair value, which was based on quoted market prices.
Purchases and sales of trading securities were recognized on a trade-date basis,
the date the order to buy or sell is executed. Net realized gains or losses were
determined on the first-in, first-out cost method. We marked our investment to
market on each balance sheet date. Any decline in fair value was recorded as an
unrealized loss, while any increase in fair value was recorded as an unrealized
gain. Realized gains and losses and unrealized holding gains and losses for
trading securities were included in other income (expense), net.
14
In first quarter 2001, we recognized net losses of $4.0 million in connection
with our securities trading activities in other expense, net. In first quarter
2001, we incurred interest expense of $150,000 on the margin borrowings related
to our securities trading activities. Since October 2001, we have held no
trading securities in accordance with our current investment policy and had no
outstanding margin borrowings.
Results of Operations
The following table sets forth selected line items from our statements of
operations as a percentage of net sales for the periods indicated:
Three Months Ended
January 31,
-----------------------------------------
2002 2001
------------------- -------------------
Net sales 100.0% 100.0%
Cost of goods sold 60.5 53.6
------------------- -------------------
Gross profit 39.5 46.4
Selling, general and administrative expenses 30.8 23.1
------------------- -------------------
Income from operations 8.7 23.3
Other expense, net (0.5) (24.3)
------------------- -------------------
Income (loss) before income tax
expense (benefit) 8.2 (1.0)
Income tax expense (benefit) 2.9 (0.3)
------------------- -------------------
Net income (loss) 5.3% (7.0)%
=================== ===================
Net Sales
Net sales decreased 33.0% to $11.4 million in first quarter 2002 from $17.0
million in first quarter 2001. By comparison, net sales were $11.9 million in
fourth quarter 2001 and $11.3 million in first quarter 2000. The decrease in net
sales during first quarter 2002, when compared to the same period last year, was
a result of weak economic conditions on market demand, a trend that
significantly affected the Company beginning in the second half of fiscal year
2001. Total fiber meters shipped in first quarter 2002 decreased 35.8% to 37.7
million fiber meters shipped from 58.7 million fiber meters shipped for the same
period in 2001.
During first quarter 2002, the Company experienced a relatively stable product
mix for cable containing multimode fiber (which typically has a higher relative
sales price), compared to cable containing single-mode fiber (which typically
has a lower relative sales price), when compared to first quarter 2001. The
percentage of multimode fiber meters shipped to total fiber meters shipped
during first quarter 2002 was only slightly higher than during first quarter
2001.
Cable containing multimode fiber is generally used for communications over
shorter distances where the higher bandwidth capacity and the higher
transmission equipment cost of single-mode fiber is not required. Multimode
fiber cable is often used in datacom applications. Cable containing single-mode
fiber is generally used for communications over longer distances and where
higher bandwidth capacity is required. Single-mode fiber cable is often used in
telecom, CATV and various Internet applications.
15
Gross Profit
Gross profit margin (gross profit as a percentage of net sales) decreased to
39.5% in first quarter 2002 from 46.4% in first quarter 2001, as production
costs did not decrease at the same relative rate as the decrease in net sales.
By comparison, the gross profit margin for fourth quarter 2001, was 21.8%, a
quarter in which we wrote-off slow-moving and impaired inventory to net
realizable value, disposed of certain impaired finished goods inventory, and
adjusted inventory for book to physical variances resulting from year-end
physical inventory counts. Although raw material cost per fiber meter shipped
increased slightly during first quarter 2002 compared to first quarter 2001,
most of the production cost increase was a result of increases in labor and
overhead costs per fiber meter shipped.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales were
30.8% in first quarter 2002 compared to 23.1% in first quarter 2001. By
comparison, selling, general and administrative expenses were 47.2% of net sales
in fourth quarter 2001, mainly due to the $902,000 charge recorded in
anticipation of settlement of the lawsuit with the Equal Employment Opportunity
Commission for alleged prior discriminatory practices and related complaints.
The higher percentage in first quarter 2002 reflects the fact that net sales for
the quarter decreased 33.0% compared to the same period last year, while
selling, general and administrative expenses only decreased 10.7% compared to
first quarter 2001. The decrease in selling, general and administrative expenses
during first quarter 2002 compared to the same period last year is explained by
a decrease in sales commissions and shipping costs, and a decrease of $160,000
in bad debt expense, that were partially offset by an increase of $260,000 in
legal and other professional fees.
Other Income (Expense)
Other expense, net decreased to $57,000 in first quarter 2002 from $4.1 million
in first quarter 2001. The decrease was primarily due to cessation of securities
trading activity, the liquidation of our remaining investments in the Nasdaq 100
Trust and the pay off of the outstanding margin borrowings prior to the end of
fiscal year 2001. In first quarter 2001, we recognized net losses of $4.0
million in connection with our securities trading activities, and incurred
interest expense of $150,000 on the margin borrowings related to such
activities. Since October 2001, we have held no trading securities in accordance
with our current investment policy and had no outstanding margin borrowings.
Please see our discussion of trading securities in "Overview" above.
Income (Loss) Before Income Tax Expense (Benefit)
Income (loss) before income taxes increased to pretax income of $932,000 in
first quarter 2002 from a pretax loss of ($176,000) in first quarter 2001. This
increase was primarily due to the $4.0 million decrease in losses on trading
securities, net and the $421,000 decrease in selling, general and administrative
expenses, partially offset by the $3.4 million decrease in gross profit largely
resulting from the decrease in net sales.
Income Tax Expense (Benefit)
Income tax expense (benefit) increased to tax expense of $328,000 in first
quarter 2002 from a tax benefit of ($62,000) in first quarter 2001. The increase
in income tax expense was a result of our return to pre-tax profitability in
first quarter 2002, while recording a pre-tax loss during first quarter 2001.
Our effective tax rate was 35.2% in first quarter 2002, compared to 35.0% in
first quarter 2001. Fluctuations in our effective tax rates are due primarily to
the amount and timing of the tax benefits related to our Extraterritorial Income
16
Exclusion and our foreign sales corporation, both of which exempt from federal
income taxation a portion of the net profit realized from sales outside of the
United States of products manufactured in the United States.
Net Income (Loss)
Net income for first quarter 2002 was $604,000 compared to a net loss of
($115,000) for first quarter 2001. This $719,000 increase in net income was
primarily due to the $4.0 million decrease in losses on trading securities, net
and the $421,000 decrease in selling, general and administrative expenses,
partially offset by the $3.4 million decrease in gross profit largely resulting
from the decrease in net sales, and the $390,000 increase in income tax expense.
Financial Condition
Total assets decreased $1.8 million, or 4.1%, to $41.0 million at January 31,
2002, from $42.8 million at October 31, 2001. This decrease was primarily due to
a $1.3 million decrease in trade accounts receivable, net, resulting from the
decreased sales volume during first quarter 2002 as compared to the three months
ended October 31, 2001, and a $224,000 decrease in inventories, partially offset
by a $452,000 increase in cash and cash equivalents.
Total liabilities decreased slightly less than $2.4 million, or 15.8%, to $12.6
million at January 31, 2002, from $14.9 million at October 31, 2001. This
decrease was due to a $1.7 million decrease in notes payable to our bank under
our lines of credit, and a $654,000 decrease in accounts payable, accrued
expenses and accrued compensation and payroll taxes.
Total stockholders' equity at January 31, 2001 increased $604,000, or 2.2% in
first quarter 2002. The increase resulted from net income retained for the three
months ended January 31, 2002.
Liquidity and Capital Resources
Our primarily capital needs have been to fund working capital requirements and
capital expenditures. Our primary source of capital for these purposes has been
cash provided from operations and borrowings under our bank lines of credit
described below. The outstanding balance under our lines of credit totaled $6.6
million at January 31, 2002, a decrease of $1.7 million from the $8.3 million
balance at October 31, 2001.
Our cash and cash equivalents totaled $2.5 million at January 31, 2002, an
increase of $452,000 compared to $2.1 million at October 31, 2001. The increase
in cash and cash equivalents in first quarter 2002 was primarily due to cash
provided by operating activities of $1.9 million and $367,000 provided by the
receipt of the cash surrender value of a life insurance policy on Mr. Robert
Kopstein, a former officer, which was partially offset by repayments of
borrowings under our bank lines of credit in the amount of $1.7 million and
$125,000 in purchases of property and equipment.
On January 31, 2002, we had working capital of $15.4 million, compared to $14.2
million as of October 31, 2001, an increase of $1.2 million. The ratio of
current assets to current liabilities as of January 31, 2002, was 2.3 to 1,
compared to 2.0 to 1 as of October 31, 2001. The increase in working capital in
first quarter 2002 was primarily caused by a $1.7 million decrease in notes
payable to our bank under our lines of credit, a $654,000 decrease in accounts
payable, accrued expenses and accrued compensation and payroll taxes, a $452,000
increase in cash and cash equivalents, partially offset by a $1.3 million
decrease in trade accounts receivable, net, and a $224,000 decrease in
inventories.
17
Net cash provided by operating activities was $1.9 million in first quarter
2002, compared to $1.5 million in first quarter 2001. Net cash provided by
operating activities during first quarter 2002 primarily resulted from cash
provided by operating income, a $1.0 million decrease in trade accounts
receivable, a $224,000 decrease in inventories, and a $301,000 decrease in
income taxes refundable, partially offset by a total decrease of $597,000 in
accounts payable, accrued expenses (including accrued compensation and payroll
taxes) and other liabilities, and a total increase of $200,000 in other
receivables and prepaid expenses. Net cash provided by operating activities
during first quarter 2001 primarily resulted from cash provided by operating
income, a $1.2 million increase in the amount payable to an investment broker in
connection with our securities trading activities, a total of $1.9 million from
a decrease trading securities and from unrealized losses on trading securities,
and a total increase of $921,000 in accounts payable, accrued expenses
(including accrued compensation and payroll taxes) and other liabilities,
partially offset by a $2.6 million increase in trade accounts receivable, a
$316,000 increase in inventories, a $818,000 increase in income taxes
refundable, and a total increase of $162,000 in other receivables and prepaid
expenses. We have entered into written agreements to purchase raw optical fiber.
These commitments total $12.2 million, $14.1 million, $8.6 million, and $1.2
million in fiscal years 2002, 2003, 2004 and 2005, respectively.
Net cash provided by investing activities totaled $242,000 in first quarter
2002, compared to net cash used in investing activities of $653,000 in first
quarter 2001. Net cash generated in investing activities during first quarter
2002 primarily resulted from $367,000 provided by the receipt of the cash
surrender value of a life insurance policy on a former officer, partially offset
by $125,000 in purchases of property and equipment. Net cash used in investing
activities during first quarter 2001 primarily resulted from $626,000 in
purchases of property and equipment, and a $27,000 increase in the cash
surrender value of the life insurance policy of a former officer.
Net cash used in financing activities was $1.7 million in first quarter 2002,
compared to $1.3 million in first quarter 2001. Net cash used in financing
activities in first quarter 2002 was the result of repayments on notes payable
to our bank under our lines of credit. Net cash used in financing activities in
first quarter 2001 was primarily the result of repurchases of common stock in
the amount of $1.3 million.
Under a loan agreement with our bank dated March 10, 1999, we had a $5 million
secured revolving line of credit and a $10 million secured revolving line of
credit. The lines of credit are subject to certain restrictive covenants. During
fiscal year 2001, we violated certain restrictive covenants. Effective October
30, 2001, the bank waived our defaults under the loan agreement, amended the
loan agreement and reduced the $10 million line of credit to $4.5 million for a
maximum availability of $9.5 million. As of January 31, 2002, we had combined
outstanding borrowings under these lines of credit in the amount of $6.6
million, with $2.9 million unused and available. The lines of credit bear
interest at 1.50% above the monthly LIBOR rate (3.35% as of January 31, 2002)
and are equally and ratably collateralized by our accounts receivable, contract
rights, inventory, furniture and fixtures, machinery and equipment and general
intangibles. The lines of credit will expire on March 31, 2002, unless they are
further renewed or extended. We are currently negotiating potential lines of
credit with our bank to replace our expiring lines of credit. We believe that
our cash flow from operations, current cash balances, and the lines of credit we
are working to put in place will be adequate to fund our operations for at least
the next twelve months. As of the date hereof, we have no additional material
sources of financing. Although we believe that we will be able to secure lines
of credit from our bank, in the event that we are unable to do so, and our
current lines of credit expire, we would need to secure additional funding to
provide needed liquidity for our operations. Any inability to secure necessary
funding could have a material adverse effect on our financial position, results
of operations and liquidity.
On September 27, 2000, the Equal Employment Opportunity Commission ("EEOC")
filed a lawsuit under Title VII of the Civil Rights Act against us in the United
States District Court for the Western District of Virginia. The lawsuit alleged
a pattern or practice of discrimination on the bases of gender and race. The
lawsuit sought injunctive and other relief and damages in an unspecified amount.
On December 13, 2001, the parties reached an agreement as to the amount of a
settlement (subject to final documentation and judicial review and approval). On
February 20, 2002, we reached a final settlement of the case with EEOC and the
court issued a Consent Decree setting forth the terms of the settlement.
Pursuant to the settlement and Consent Decree, we paid $500,000 on or about
February 20, 2002; and will pay $175,000 in January 2003 and $175,000 in January
18
2004, to satisfy any gender and race class claims; we paid $75,000 on or about
February 20, 2002 to one individual specifically named in the complaint; and
will spend at least $75,000 for the our planned diversity, recruitment and human
resource management programs over the term of the Consent Decree. We recorded a
charge in the fourth quarter of fiscal year 2001 in the amount of $901,553
representing $575,000 (current portion) payable upon entry of the Consent
Decree, as well as $326,553 (noncurrent portion) representing the present value
of two equal payments in the amount of $175,000 payable in January 2003 and
2004. No additional charges were recorded in first quarter 2002 as a result of
the settlement. The $75,000 to be used for our planned diversity, recruitment
and human resource management programs will be expensed as incurred.
We were named as a defendant in two lawsuits filed in the United States District
Court for the Southern District of New York seeking to compel us to authorize
our transfer agent to transfer unregistered, restricted stock on our stock
ledger. The first suit was filed on October 22, 2001, by Bear, Stearns & Co.
Inc. and Bear, Stearns Securities Corporation (collectively, "Bear Stearns").
The second suit was filed on October 26, 2001, by UBS PaineWebber Inc.
("PaineWebber"). In each case, PaineWebber and Bear Stearns sought injunctive
relief with respect to our common stock sold by them in the course of
liquidating either repossessed shares or brokerage accounts of Mr. Robert
Kopstein, our former Chairman, President and Chief Executive Officer, to cover
personal margin loans made by the brokerage firms to Mr. Kopstein. Both suits
also contained a claim of monetary damages caused by the alleged wrongful
refusal by us to authorize the transfers in connection with the liquidations.
Subsequent to January 31, 2002, both suits were dismissed. PaineWebber
voluntarily dismissed its lawsuit with prejudice, while the Bear Stearns lawsuit
was voluntarily dismissed without prejudice.
The Company, Mr. Robert Kopstein (our former Chairman, President and Chief
Executive Officer), and various John Does (unidentified officers and/or
directors of the Company during the class period described below) were named as
defendants in four putative class action lawsuits filed in the United States
District Court for the Western District of Virginia (the "Suits"). The first
class action lawsuit was filed on November 26, 2001, by Charles S. Farrell, Jr.,
on behalf of himself and others similarly situated. The second class action
lawsuit was filed on December 14, 2001, by Lerner Group, on behalf of itself and
others similarly situated. The third class action lawsuit was filed on December
27, 2001, by Richard Simone, on behalf of himself and others similarly situated.
The fourth class action lawsuit was filed on January 31, 2002, by Charles H.
Yeatts, on behalf of himself and others similarly situated. In each of the
substantially similar suits, the plaintiffs purport to represent purchasers of
the Company's common stock during the period from July 31, 2000, through October
8, 2001 (the putative class period), and allege that the defendants violated
Sections 10(b) and 20 of the federal Securities Exchange Act of 1934 and were
negligent in making certain alleged misrepresentations and/or omitting to
disclose material facts. The plaintiffs in each of the Suits seek compensatory
and exemplary damages in an unspecified amount, as well as reasonable costs and
expenses incurred in the cause of action, including attorneys' fees and expert
fees. Under the Private Securities Litigation Reform Act of 1995, the United
States District Court for the Western District of Virginia is required to
appoint an individual shareholder or group of shareholders as lead plaintiff for
the Suits. We anticipate that the Court will also consolidate the Suits into a
single action and that the lead plantiff will file a consolidated amended class
action complaint.
Management intends to vigorously defend the Suits. We may, however, incur
substantial costs in defending ourselves against the Suits, regardless of their
merit or outcome. At this early stage in the Suits, management cannot make a
reasonable estimate of the monetary amount of its resolution, or estimate a
range of reasonably possible losses, if any. If we are unsuccessful, we could be
subject to damages that may be substantial and could have a material adverse
effect on our financial position, results of operations and liquidity.
19
From time to time, we are involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
our financial position, results of operations or liquidity.
Contractual Obligations and Commitments
The table below sets forth a summary of our contractual obligations and
commitments that will impact on our future liquidity:
Fiscal Years Ending October 31,
Contractual Obligations and
Commitments 2002 2003 2004 2005 TOTALS
- --------------------------- ---- ---- ---- ---- ------
Bank Lines of Credit $6,563,000 $ - $ - $ - $6,563,000
Long-term Optical Fiber
Supply Agreements 12,207,000 14,104,000 8,641,000 1,247,000 36,199,000
EEOC Settlement 575,000 175,000 175,000 - 925,000
----------- ----------- ---------- ---------- -----------
Totals $19,345,000 $14,279,000 $8,816,000 $1,247,000 $43,687,000
=========== =========== ========== ========== ===========
Bank Lines of Credit
Under the terms of our loan agreement dated March 10, 1999, as amended, our $9.5
million lines of credit expire on March 31, 2002. We are currently negotiating
potential lines of credit with our bank to replace our expiring lines of credit.
Although we believe that we will be able to secure new lines of credit from our
bank, in the event that we are unable to do so, we would need to secure
additional funding to provide needed liquidity for our operations.
See further discussion under "Liquidity and Capital Resources."
Long-Term Optical Fiber Supply Agreements
During fiscal year 2001, we entered into separate long-term supply agreements
with two optical fiber suppliers. One agreement expires on December 31, 2003 and
the other on December 31, 2004. The aggregate required purchases related to
these agreements (subject to certain annual price adjustments) during the terms
of the agreements are set forth above. Additionally, one of the supply
agreements requires that one-half of all single-mode fiber purchases through
December 31, 2004 above the committed amounts be purchased from that supplier at
market prices. We believe that the fiber purchase commitments are consistent
with our expected requirements.
Equal Employment Opportunity Commission Settlement
On September 27, 2000, the Equal Employment Opportunity Commission ("EEOC")
filed a lawsuit under Title VII of the Civil Rights Act against us in the United
States District Court for the Western District of Virginia. The lawsuit alleged
a pattern or practice of discrimination on the bases of gender and race. The
lawsuit sought injunctive and other relief and damages in an unspecified amount.
On December 13, 2001, the parties reached an agreement as to the amount of a
settlement (subject to final documentation and judicial review and approval). On
20
February 20, 2002, we reached a final settlement of the case with EEOC and the
court issued a Consent Decree setting forth the terms of the settlement.
Pursuant to the settlement and Consent Decree, we paid $500,000 on or about
February 20, 2002; and will pay $175,000 in January 2003 and $175,000 in January
2004, to satisfy any gender and race class claims; we paid $75,000 on or about
February 20, 2002 to one individual specifically named in the complaint; and
will spend at least $75,000 for the our planned diversity, recruitment and human
resource management programs over the term of the Consent Decree. We recorded a
charge in the fourth quarter of fiscal year 2001 in the amount of $901,553
representing $575,000 (current portion) payable upon entry of the Consent
Decree, as well as $326,553 (noncurrent portion) representing the present value
of two equal payments in the amount of $175,000 payable in January 2003 and
2004. No additional charges were recorded in first quarter 2002 as a result of
the settlement. The $75,000 to be used for our planned diversity, recruitment
and human resource management programs will be expensed as incurred, and is not
reflected in the Contractual Obligations and Commitments table above.
Critical Accounting Policies
Revenue Recognition
Revenue is recognized at the time of product shipment or delivery to the
customer, provided that the customer takes ownership and assumes risk of loss
based on shipping terms. Net sales consists of gross sales of products, less
discounts, refunds and returns. We estimate sales returns based on our analysis
and judgment of historical trends, identified returns and the potential for
additional returns. We also provide certain volume incentives, discounts and
rebates to certain of our distributors. Payments of any such volume incentives,
discounts and rebates are reflected in net sales.
Trade Accounts Receivable and Allowance for Doubtful Accounts
In connection with the sale of our products, we have trade accounts receivable
outstanding from our customers at any given time. We review outstanding trade
accounts receivable at the end of each quarter, and record allowances for
doubtful accounts as deemed appropriate for (i) certain individual customers and
(ii) for all other trade accounts receivable in total not specifically reviewed.
In determining the amount of allowance for doubtful accounts to be recorded for
individual customers, we consider the age of the receivable, the financial
stability of the customer, discussions that may have been had with the customer
and our judgment as to the overall collectibility of the receivable from that
customer. In addition, we establish an allowance for all receivables that have
not been individually reviewed. This general allowance for doubtful accounts is
based on a percentage of total trade accounts receivable with different
percentages used based on the different age of the receivables. The percentages
used are based on our historical experience and our current judgment regarding
the state of the economy.
Inventories
Inventories of raw materials and production supplies are stated at the lower of
cost (specific identification for optical fibers and first-in, first-out for
other raw materials and production supplies) or market. Inventories of work in
process and finished goods are stated at average cost, which includes raw
materials, direct labor and manufacturing overhead. At the end of each quarter,
we review our inventories to ensure they are carried at net realizable value.
Individual inventory items are viewed and adjustments are made based on the age
of the inventory and our judgment as to the salability of that inventory.
Long-Lived Assets
Our property and equipment are stated at cost. Depreciation and amortization are
provided for using both straight-line and declining balance methods over the
estimated useful lives of the assets. We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. We have no significant intangible assets
recorded on our balance sheet.
Commitments and Contingencies
Liabilities for loss contingencies arising from product warranties and defects,
claims, assessments, litigation, fines and penalties and other sources are
recorded when it is probable that a liability has been incurred and the amount
of the assessment can be reasonably estimated. Actual results could differ from
these estimates.
21
Future Accounting Considerations
In July 2001, the Financial Accounting Standards Board, also known as the FASB,
issued Statement of Financial Accounting Standards, referred to as SFAS, No.
141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. SFAS No. 141 requires the use of the purchase method of accounting for
all business combinations. The use of the pooling-of-interests method is
prohibited for business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill and certain intangible assets would no longer be
amortized, but rather be tested for impairment annually or whenever an event
occurs indicating that the assets may be impaired. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Neither standard is expected to
have a material effect on our financial position, results of operations or
liquidity.
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an assets
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, an
entity would recognize a gain or loss on settlement.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We are
currently evaluating the impact of SFAS No. 143 on our financial position,
results of operations and liquidity.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF; however, it retains many of the
fundamental provisions of that Statement.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business.
However, it retains the requirement in APB No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced management's ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity.
22
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. Early application is encouraged. The
provisions of SFAS No. 144 generally are to be applied prospectively. We are
currently evaluating the impact of SFAS No. 144 on our financial position,
results of operations and liquidity.
As of January 31, 2002, there are no other new accounting standards issued, but
not yet adopted by us, which are expected to be applicable to our financial
position, operating results or financial statement disclosures.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not engage in derivative financial instruments or derivative
commodity instruments. As of January 31, 2002, our financial
instruments are not exposed to significant market risk due to
interest rate risk, foreign currency exchange risk, commodity price
risk or equity price risk.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On September 27, 2000, the Equal Employment Opportunity Commission
("EEOC") filed a lawsuit under Title VII of the Civil Rights Act
against the Company in the United States District Court for the Western
District of Virginia. The lawsuit alleged a pattern or practice of
discrimination on the bases of gender and race. The lawsuit sought
injunctive and other relief and damages in an unspecified amount. On
December 13, 2001, the parties reached an agreement as to the amount of
a settlement (subject to final documentation and judicial review and
approval). On February 20, 2002, the Company reached a final settlement
of the case and the court issued a Consent Decree setting forth the
terms of the settlement. Pursuant to the settlement and Consent Decree,
the Company paid $500,000 on or about February 20, 2002; and will pay
$175,000 in January 2003 and $175,000 in January 2004, to satisfy any
gender and race class claims; the Company paid $75,000 on or about
February 20, 2002 to one individual specifically named in the
complaint; and will spend at least $75,000 for the Company's planned
diversity, recruitment and human resource management programs over the
term of the Consent Decree. The Company recorded a charge in the fourth
quarter of fiscal year 2001 in the amount of $901,553 representing
$575,000 (current portion) payable upon entry of the Consent Decree, as
well as $326,553 (noncurrent portion) representing the present value of
two equal payments in the amount of $175,000 payable in January 2003
and 2004. No additional charges were recorded in first quarter 2002 as
a result of the settlement. The $75,000 to be used for the Company's
planned diversity, recruitment and human resource management programs
will be expensed as incurred.
The Company was named as a defendant in two lawsuits filed in the
United States District Court for the Southern District of New York
seeking to compel the Company to authorize its transfer agent to
transfer unregistered, restricted stock on the Company's stock ledger.
The first suit was filed on October 22, 2001, by Bear, Stearns & Co.
Inc. and Bear, Stearns Securities Corporation (collectively, "Bear
Stearns"). The second suit was filed on October 26, 2001, by UBS
PaineWebber Inc. ("PaineWebber"). In each case, PaineWebber and Bear
Stearns sought injunctive relief with respect to common stock of the
Company sold by them in the course of liquidating either repossessed
shares or brokerage accounts of the Company's former Chairman,
President and Chief Executive Officer, to cover personal margin loans
made by the brokerage firms to him. Both suits also contained a claim
of monetary damages caused by the alleged wrongful refusal by the
Company to authorize the transfers in connection with the liquidations.
Subsequent to January 31, 2002, both suits were dismissed. PaineWebber
voluntarily dismissed its lawsuit with prejudice, while the Bear
Stearns lawsuit was voluntarily dismissed without prejudice.
The Company, Mr. Robert Kopstein (our former Chairman, President and
Chief Executive Officer), and various John Does (unidentified officers
and/or directors of the Company during the class period described
below) were named as defendants in four putative class action lawsuits
filed in the United States District Court for the Western District of
Virginia (the "Suits"). The first class action lawsuit was filed on
November 26, 2001, by Charles S. Farrell, Jr., on behalf of himself and
others similarly situated. The second class action lawsuit was filed on
December 14, 2001, by Lerner Group, on behalf of itself and others
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similarly situated. The third class action lawsuit was filed on
December 27, 2001, by Richard Simone, on behalf of himself and others
similarly situated. The fourth class action lawsuit was filed on
January 31, 2002, by Charles H. Yeatts, on behalf of himself and others
similarly situated. In each of the substantially similar suits, the
plaintiffs purport to represent purchasers of the Company's common
stock during the period from July 31, 2000, through October 8, 2001
(the putative class period), and allege that the defendants violated
Sections 10(b) and 20 of the federal Securities Exchange Act of 1934
and were negligent in making certain alleged misrepresentations and/or
omitting to disclose material facts. The plaintiffs in each of the
Suits seek compensatory and exemplary damages in an unspecified amount,
as well as reasonable costs and expenses incurred in the cause of
action, including attorneys' fees and expert fees. Under the Private
Securities Litigation Reform Act of 1995, the United States District
Court for the Western District of Virginia is required to appoint an
individual shareholder or group of shareholders as lead plaintiff for
the Suits. We anticipate that the Court will also consolidate the Suits
into a single action and that the lead plantiff will file a
consolidtaed amended class action complaint.
Management intends to vigorously defend the Suits. The Company may,
however, incur substantial costs in defending the Suits, regardless of
their merit or outcome. At this early stage in the Suits, management
cannot make a reasonable estimate of the monetary amount of their
resolution, or estimate a range of reasonably possible losses, if any.
If we are unsuccessful, we could be subject to damages that may be
substantial and could have a material adverse effect on our financial
position, results of operations and liquidity.
From time to time, the Company is involved in various other claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will
not have a material adverse effect on the Company's financial position,
results of operations or liquidity.
Item 2. Changes in Securities and Use of Proceeds.
On November 2, 2001, the Board of Directors of the Company adopted a
new Shareholder Rights Plan (the "Rights Plan") and declared a dividend
of one preferred share purchase right (a "Right") on each outstanding
share of common stock. Under the terms of the Rights Plan, if a person
or group acquires 15% (or other applicable percentage, as provided in
the Rights Plan) or more of the outstanding common stock, each Right
will entitle its holder (other than such person or members of such
group) to purchase, at the Right's then current exercise price, a
number of shares of common stock having a market value of twice such
price. In addition, if the Company is acquired in a merger or other
business transaction after a person or group has acquired such
percentage of the outstanding common stock, each Right will entitle its
holder (other than such person or members of such group) to purchase,
at the Right's then current exercise price, a number of the acquiring
company's common shares having a market value of twice such price.
Upon the occurrence of certain events, each Right will entitle its
holder to buy one one-thousandth of a Series A preferred share
("Preferred Share"), at an exercise price of $25, subject to
adjustment. Each Preferred Share will entitle its holder to 1,000 votes
and will have an aggregate dividend rate of 1,000 times the amount, if
any, paid to holders of common stock. The Rights will expire on
November 2, 2011, unless the date is extended or unless the Rights are
earlier redeemed or exchanged at the option of the board of directors
for $.0001 per Right. Generally, each share of common stock issued
after November 5, 2001 will have one Right attached. The adoption of
the Rights Plan has no impact on the financial position or results of
operations of the Company. The Company has reserved 100,000 of its
authorized preferred stock for issuance upon exercise of the Rights.
Item 5. Other Information.
In February 2002, our Board appointed Craig H. Weber to serve as a new
member of the Board.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K for the three months
ended January 31, 2002:
Exhibit 3.1 Amended and Restated Articles of
Incorporation (incorporated by reference to Exhibit 1 to the
Company's Form 8-A filed with the Commission on November 5,
2001).
Exhibit 3.2 Bylaws of Optical Cable Corporation, as
amended (filed as Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1997
(file number 0-37022), and incorporated herein by reference)).
26
Exhibit 4.1 Form of certificate representing preferred
share purchase right (filed as Exhibit 5 to the Company's Form
8-A filed with the Commission on November 5, 2001 and
incorporated by reference herein).
(b) Reports on Form 8-K filed during the three months ended January 31,
2002:
Form 8-K dated December 7, 2002, reporting under Item 5.
Form 8-K dated December 10, 2002, reporting under Item 5.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTICAL CABLE CORPORATION
(Registrant)
Date: March 18, 2002 /s/ Neil D. Wilkin, Jr.
--------------------------------------------------
Neil D. Wilkin, Jr.
Acting-President, Senior Vice President and
Chief Financial Officer
(principal executive officer, principal financial
and accounting officer)
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